Scrap suppliers in USA feel credit insurers’ pinch

Some US ferrous scrap dealers were dealt a blow this past week as credit insurance was pulled from one of the only steel mills that has been making decent-sized scrap buys in recent months.

Some US ferrous scrap dealers were dealt a blow this past week as credit insurance was pulled from one of the only steel mills that has been making decent-sized scrap buys in recent months.

Two insurers have now pulled credit insurance from Canton, Ohio-based Republic Steel, prompting suppliers to scramble to find a different home for their material. A third insurer is still offering coverage to those that want to ship to the mill.

“I can’t take a risk like that,” one Ohio-based scrap metal recycler source said, adding that his expectations for the near term have now become even bleaker. “There are no homes for scrap; steelmakers are not making money and their order books are terrible. It is just ugly. Things are unravelling here, and it is worse than 2008.”

A Republic spokesman said the company is having no issues procuring scrap, although it recognises some smaller suppliers could be feeling pressure.

As for the availability of credit insurance for scrap suppliers who choose coverage, Republic has no first-hand knowledge of this. “We are unaware of the extent to which our vendor base avails [itself] of credit insurance coverage. We are, however, committed to continuing mutually beneficial business with all of our vendors,” the spokesman said.

The downturn in oil and gas prices is taking a toll on mills in Cleveland, Youngstown, Ohio, and Pittsburgh, which are operating at reduced levels. This in turn has created a scrap oversupply dynamic.

While it is struggling with the challenging environment, Republic is in good financial shape. “It is no secret that Republic, and the steel industry in general, is dealing with very difficult times due to the downturn in the energy market. In addition, Republic made a large investment in a new melt shop in Lorain [Ohio], which is now idled,” the spokesman said.

“We have taken the necessary steps to right-size our company to this new environment, and we are confident that we will emerge an even stronger company through this temporary downturn, with the full backing of our parent companies, which have supported Republic with over $200 million of capital investment over the past two years alone,” he added.

Grupo Simec SAB de CV, Republic’s parent, posted a net income of 517.9 million Mexican pesos ($30.8 million) for 2014.

The entire Ohio Valley is feeling the pain of harsh market conditions, with no signs of a turnaround. The dismal outlook is expected to last through year-end. For example, one Youngstown steelmaker is buying 10,000 gross tons of scrap per month compared with 65,000 tons during normal circumstances, while a Cleveland mill is running only ten days per month.

Two credit insurers have publicly issued negative outlooks on the metal sector. This month, Amsterdam-based Atradius NV issued a warning that increased imports and decreasing demand from the US oil sector would negatively impact profits, increase payment delays and bring about insolvencies in the oil country tubular goods (OCTG) sector.

“Payment delays and defaults have increased and are expected to rise further as the cash flow of end-buyers has been impacted by lower growth, especially in the OCTG and construction sectors. Insolvencies have increased in the OCTG-related segment and are expected to increase further in 2015,” Atradius said in a September metal industry outlook.

Paris-based Euler Hermes Group had also warned in a July metals outlook that selling prices for finished metals were expected to decline 18% this year compared with last year as a result of global overcapacity.

“The US steel market is currently facing three major headwinds: falling prices, oversupply and foreign steel dumping. […] The drop in both oil prices and drilling rig counts has drastically decreased demand for tubular products and flat rolled products used to ultimately create tubular products,” Euler Hermes said.

The repercussions will be felt by steel producers. “Without intervention from government legislation to protect against foreign steel dumping, there will be further consolidation and insolvencies among US steel producers,” the insurer added.

This report was first published by American Metal Market

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